NEW BUSINESS, NOT SMALL BUSINESS, IS WHAT CREATES JOBS

November 9, 2009

As policy makers search for the best remedies to strengthen our economic performance, they can't afford to overlook new firms and young firms, says the Kauffman Foundation.

Unfortunately, in troubled economic times the language of recovery is too often tilted toward large, established companies or to "small businesses," a broad term that traditionally applies to businesses with fewer than 500 employees. The conventional wisdom is that such businesses account for half of the labor force and are therefore the engine of future job creation.

That's not quite the case. The more precise factor is not the size of businesses, but rather their age, says Kauffman:

As recently as 2007, two-thirds of the jobs created were in such firms.

Put more starkly, without new businesses, job creation in the American economy would have been negative for many years.

According to the Census Bureau, nearly all net job creation in the United States since 1980 occurred in firms less than five years old.

There are countless new businesses sparking job creation throughout the U.S. economy. But countless other young companies never expand or even get off the ground because of regulatory and economic barriers. Policy makers should be eliminating these barriers and creating incentives to foster the creation and growth of new businesses. Four measures to do so stand out, says Kauffman:

Welcome immigrants seeking scientific training at our universities.

Unleash America's academic entrepreneurs.

Provide easier access to capital.

Make it easier for companies seeking capital to go public.

Entrepreneurs have a proven track record of job creation, especially in the early years of their firms. Eliminating or lowering the economic and regulatory hurdles that stand in the way of their success will pave the way for sustained expansion after the government's current stimulus measures come to their inevitable end, says Kauffman.

Source: Carl Schramm, Robert Litan and Dane Stangler, "New Business, Not Small Business, Is What Creates Jobs," Wall Street Journal, November 6, 2009.